The Complete Guide to Buying and Owning a Recreational Property in Canada

By Douglas Gray

Prime vacation property throughout Canada has doubled in value within the past five years. For the potential buyer of a vacation property, the cost of entry can be stiff. There is a high demand for many to own a vacation home or idyllic retreat for pleasure and lifestyle enjoyment, future retirement, rental revenue, or investment profit. But buying a recreational property can be a potential minefield for many reasons, as there can be complex tax, legal, estate planning, and investment issues to consider.

When investing hundreds of thousands of dollars in a recreational property you will need to do your due diligence and seek solid advice. The Complete Guide to Buying and Owning Recreational Property in Canada, written by Canada's leading authority on matters related to real estate, offers valuable insights and tips, and will prove a trustworthy resource for many years to come.

Topic areas include:

• Buying the right property, for the right reasons, in the right location
• How to set a purchase and financing strategy and how to negotiate your best deal
• How to exercise caution when buying with family or friends-and how to keep peace in the family when sharing use or ownership
• Getting the help of professionals, such as a tax accountant, lawyer, home inspector, mortgage broker, insurance broker, and realtor.
• Obtaining tax and estate planning strategic advice to save tax on transfer, sale or bequeathing of the property, or inheriting a property
• What you need to know if you are buying recreational property as an investment.
• Money saving tips when renting your property yourself or using professional rental management
• Special cautions if buying a vacation home or cottage outside of Canada
• Creative ways of using your vacation home or cottage for exchange or barter
• Key strategies to follow and classic pitfalls to avoid
• And much, much more! Plus Sources of Further Information, Key Websites, Checklists, Glossary, and Index.

• Language: English
• Publisher: Wiley
• Release date: Jun 11, 2009
• ISBN: 9780470739501

Douglas Gray

Douglas Gray is a lawyer, businessman, lecturer, and consultant to government, business, professionals, and educational and financial institutions. He has designed and taught numerous seminars and workshops on successful entrepreneurship, starting a consulting business, and marketing professional services. He has also lectured at community colleges and universities as well as professional development programs in the areas of small business, real estate, economic development, professional consulting, and training program development.

Book preview

001

Table of Contents

Praise

BESTSELLING BOOKS BY DOUGLAS GRAY

Title Page

Copyright Page

Acknowledgements

Introduction

Why Recreational Properties Are in High Demand

Highlights of Chapter Contents

PART I - The Realities of Realty

CHAPTER 1 - How the Real Estate Market Works

The Real Estate Cycle

External Factors that Can Affect the Real Estate Market

Three Types of Real Estate Markets

Factors that Affect Recreational Real Estate Prices

CHAPTER 2 - Why Recreational Real Estate Is a Good Investment

Attractive Return on Investment (ROI)

Tax Advantages

Low Starting Capital Using Principle of Leverage

Low Risk

Appreciation

Equity Build-up

Inflation Hedge

Increasing Demand for Land

Part-time Involvement and Flexible Options

CHAPTER 3 - Types of Recreational Real Estate

Condominium

Expenses Relating to Condo Ownership

Advantages and Disadvantages of Condominium Ownership

Buying a Lot and Building a House

Raw Land

Mobile Home

Manufactured Homes

Timeshares

PART II - Finding the Right Fit

CHAPTER 4 - Finding the Right Recreational Property

Factors to Consider When Selecting a Recreational Property

Where to Get General Information

Where to Get Specific Information

Special Considerations When Assessing Recreational Property for Purchase

Before Starting Your Property Search

Where to Find Recreational Real Estate for Sale

CHAPTER 5 - Selecting Your Advisors

Common Selection Criteria

Comparing Candidates

Selecting a Realtor

Selecting a Lawyer

Selecting an Accountant

Selecting a Mortgage Broker

Selecting a Home Inspector

Selecting an Insurance Broker

PART III - Show Me the Money

CHAPTER 6 - Mortgages and Other Creative Financing Options

Common Types of Mortgages

How the Terms of the Mortgage Are Connected to the Interest Rate

Recreational Property Interest Rates Might Vary

Be Aware that Recreational Properties Are Eligible for High-Ratio Insurance

Know the Mortgage Hierarchy

How Getting a Pre-approved Mortgage Can Help You

Using a Mortgage Broker

Using Your RRSP to Invest in Your Own Recreational Property Mortgage

Lending Money for Your Recreational Property Mortgage from Your Own Business

Love Money Financing: Borrowing from Family or Friends

CHAPTER 7 - Negotiating the Best Deal

Preparing for Real Estate Negotiation

Typical Reasons Why Recreational Properties Are Put up for Sale

Typical Reasons Why Vacation Investment Properties Are Put Up for Sale

Negotiating Tips and Techniques

CHAPTER 8 - Investing for Yourself or with Others

Where to Begin

Key Investment Strategies to Consider

Investing with Others

Factors to Consider When Buying Real Estate with Others

Types of Group Investments

Putting the Arrangement in Writing

Pitfalls to Avoid

PART IV - Planning for Peace of Mind

CHAPTER 9 - Legal Issues and Strategies

Types of Sole Ownership of Property

Types of Joint Ownership in Property

Understanding the Purchase-and-Sale Agreement

Title Insurance

CHAPTER 10 - Tax Issues and Strategies

Local Taxes

Provincial Taxes

Federal Taxes

How the GST System Works on Property Purchases

Income Tax

Key Tax-planning Strategy: The Principal Residence Exemption

Real Estate Investment Property

Capital Gains or Income?

Capital Expenses

Current Expenses

Keeping Records

CHAPTER 11 - Insurance Issues and Strategies

Selecting an Insurance Broker

Types of Property Coverage

How Insurance Companies Calculate the Premium

Ways to Reduce Your Premiums

Personal Liability Protection

Additional Types of Insurance to Consider

CHAPTER 12 - Will Planning Issues and Strategies

Why You Need a Will

What’s in a Will?

What Happens If You Don’t Have a Will?

Preparing a Will

Key Reasons for Consulting a Lawyer

Health Care Directive or Proxy and Representation Agreement

CHAPTER 13 - Estate Planning Issues and Strategies

What Is Estate Planning?

Keeping Things in Perspective

Will and Estate Planning and Your Vacation Property

Estate-planning Strategies for Your Vacation Property

Donating Your Recreational Property to Charity

Should You Pay Capital Gains Tax Now, or Later?

Taxation of Investment Properties on Death

Probate Taxes

Limiting Your Estate Liability Exposure

Estate-planning Tips to Remember

Keep Current with Canadian Vacation Home Magazines

PART V - Now That It’s Yours

CHAPTER 14 - Maintaining Harmony with Shared Use and Ownership

Draft a Written Vacation Home Use Agreement

Topics to Discuss and Cover in Your Agreement

Obtain Legal and Tax Advice on Your Agreement

CHAPTER 15 - Vacation Home Exchanges and Bartering Networks

Home or Vacation Exchange

Trade or Barter Exchange

Tax Implications of the Bartering Process

CHAPTER 16 - Professional or Owner-Direct Rental Management

Criteria for Deciding on the Type of Rental Management

Professional Rental Management

Self-managed or Owner-direct Rentals

The Owner-direct Option: Tips for Marketing and Managing Your Rental

Keeping Records

PART VI - Outward Bound

CHAPTER 17 - Buying Vacation Property in the United States and Abroad

Do U.S. Tax Laws Apply to You?

Resident vs. Nonresident Alien Tax Status

Internal Revenue Service (IRS) Shares Information with the Canada Revenue ...

The IRS Has Your Number

Rental Income From U.S. Real Estate

Tax on Gross Rental Income

Tax on Net Rental Income

Selling Your U.S. Real Estate

Waiver of Withholding Tax

Avoiding the U.S. Gift Tax

U.S. Taxes on Death

U.S. Estate Tax

Canadian Capital Gains Tax

The Tax Impact of Dying in the United States

Strategies for Reducing U.S. Estate Tax on Your U.S. Property

Buying a Vacation Home in Countries Other than the United States

CHAPTER 18 - Selling Your Recreational Property

Determining When to Sell

Preparing to Sell Your Property

Disadvantages of Selling the Property Yourself

The Listing Agreement

Types of Listing Agreements

Appendix

Glossary

Index

Reader Feedback and Seminars

About the Author

REVIEWER PRAISE OF BOOKS BY DOUGLAS GRAY

Making Money in Real Estate

Gray delivers the goods. It is all-Canadian, and not a retread book full of tips that are worthless north of the U.S. border. It’s chock-full of practical streetsmart strategies and advice, pitfalls to avoid, samples, what-to-look-out for, checklists and information.

—Business in Vancouver

...provides consumer insights into securing the best deal and avoiding the pitfalls... Gray’s legal background has given him valuable insights.

—The Edmonton Journal

Outstanding...peppered with practical no-nonsense tips...invaluable information throughout.

—Calgary Herald

The Complete Canadian Small Business Guide (with Diana Gray)

This guide is truly a gold mine...an admirable job...taps into the author’s expertise.

—Profit Magazine

Excellent...geared especially to Canadians, unlike most small business guides.

—Financial Times

The most informative and comprehensive guide on this subject matter.

—The Toronto Star

Home Inc.: The Canadian Home-Based Business Guide

Should be required reading for all potential home-basers...authoritative, current and comprehensive.

—The Edmonton Journal

An absolute necessity for your bookshelf...crammed with useful information.

—Victoria Times-Colonist

The Complete Canadian Franchise Guide (with Norm Friend)

Down to earth, comprehensive, easy to read and packed with practical information. A superb guide to buying a franchise. Invaluable samples and checklists. Highly recommended.

—Terry and Fran Banting, Franchisees

The Canadian Snowbird Guide

...an invaluable guide to worry-free part-time living in the U.S. ...by one of Canada’s bestselling authors of business and personal finance books...

—The Globe and Mail

Gray has written a reference book, thoughtful and complete, and prepared with the authoritative research skills and knowledge of a fastidious solicitor...as practical as a sunhat on a Tampa afternoon, and that alone warrants it a place on every southbound RV’s bookshelf.

—Quill & Quire

The Canadian Guide to Will and Estate Planning (with John Budd)

...An informative, practical guide...the authors...cover all the bases.

—The National Post

...A bargain for its price, it should be part of every family’s library.

—The Globe and Mail

BESTSELLING BOOKS BY DOUGLAS GRAY

REAL ESTATE TITLES

The Canadian Guide to Buying and Owning Recreational Property in Canada

Making Money in Real Estate: The Canadian Guide to Profitable Investment in Residential Property

101 Streetsmart Condo Buying Tips for Canadians

Real Estate Investing for Canadians for Dummies (with Peter Mitham)

Mortgages Made Easy: The All-Canadian Guide to Home Financing

Home Buying Made Easy: The Canadian Guide to Purchasing a Newly Built or Pre-Owned Home

Condo Buying Made Easy: The Canadian Guide to Apartment and Townhouse Condos, Co-ops and Timeshares

Mortgage Payment Tables Made Easy

SMALL BUSINESS TITLES

Start and Run a Consulting Business

Start and Run a Profitable Business Using Your Computer

Have You Got What It Takes? The Entrepreneur’s Complete Self-Assessment Guide

Marketing Your Product (with Donald Cyr)

The Complete Canadian Small Business Guide (with Diana Gray)

Raising Money: The Canadian Guide to Successful Business Financing (with Brian Nattrass)

The Complete Canadian Franchise Guide (with Norm Friend)

So You Want to Buy a Franchise? (with Norm Friend)

Be Your Own Boss: The Ultimate Guide to Buying a Small Business or Franchise in Canada (with Norm Friend)

The Canadian Small Business Legal Guide

PERSONAL FINANCE/RETIREMENT PLANNING TITLES

The Canadian Snowbird Guide: Everything You Need to Know about Living Part-time in the U.S.A. and Mexico

The Canadian Guide to Will and Estate Planning (with John Budd)

Risk-Free Retirement: The Complete Canadian Planning Guide (with Tom Delaney, Graham Cunningham, Les Solomon and Dr. Des Dwyer)

SOFTWARE PROGRAMS

Making Money in Real Estate (jointly developed by Douglas Gray and Phoenix Accrual Corporation)

001

Copyright © 2007 by Douglas Gray

All rights reserved. No part of this work covered by the copyright herein may be reproduced or used in any form or by any means—graphic, electronic or mechanical without the prior written permission of the publisher. Any request for photocopying, recording, taping or information storage and retrieval systems of any part of this book shall be directed in writing to The Canadian Copyright Licensing Agency (Access Copyright). For an Access Copyright license, visit www.accesscopyright.ca or call toll free 1-800-893-5777.

Care has been taken to trace ownership of copyright material contained in this book. The publisher will gladly receive any information that will enable them to rectify any reference or credit line in subsequent editions.

The material in this publication is provided for information purposes only. Laws, regulations, and procedures are constantly changing, and the examples given are intended to be general guidelines only. This book is sold with the understanding that neither the author nor the publisher is engaged in rendering professional advice. It is strongly recommended that legal, accounting, tax, financial, insurance, and other advice or assistance be obtained before acting on any information contained in this book. If such advice or other assistance is required, the personal services of a competent professional should be sought.

The author, publisher and all others directly or indirectly involved with this publication do not assume any responsibility or liability, direct or indirect, to any party for any loss or damage by errors or omissions, regardless of cause, as a consequence of using this publication, nor accept any contractual, tortuous, or other form of liability for its contents, or any consequences arising from its use.

Realtor is a registered trademark.

National Library of Canada Cataloguing in Publication Data

Gray, Douglas A

The complete guide to buying and owning recreational property in Canada / Douglas Gray. Includes index.

eISBN : 978-0-470-73950-1

1. Vacation homes. 2. House buying. I. Title. HD1379.G’.12 C2007-900982-4

Production Credits

Cover design: Ian Koo

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Acknowledgements

I am grateful for the kind assistance and helpful information given me by many parties, including the Canada and Mortgage Housing Corporation, the Canadian Real Estate Association, Genworth Financial Canada, Royal LePage, Century 21, ReMax, and Coldwell Banker. I appreciate all the assistance provided by the Condominium Home Owners’ Association of B.C., and particularly the helpful insights from the Executive Director of CHOA, Tony Gioventu. Many thanks to Bob and Lesleigh Hevey, for their invaluable insights on maintaining harmony when sharing ownership and use of a cottage with friends.

I would like to thank Nicole Langlois for the superb quality of editing that she has demonstrated throughout. Her insights, creative suggestions, and positive attitude made the editorial experience a most pleasurable one, for this book and the past books of mine she has edited with such professionalism.

My thanks and appreciation is extended to a number of tax experts and professionals who have given so graciously of their time and talent in reviewing parts of this manuscript. I am indebted to Karen Slezak, C.A., Tax Partner of Soberman, LLP, Chartered Accountants in Toronto, who kindly provided much constructive and helpful feedback on various tax issues and strategies to consider. It was a pleasure working with Karen. I would like to thank Frances Sin, Tax Manager of Soberman, LLP, Chartered Accountants in Toronto, for reviewing the section on GST. My appreciation is also extended to my colleague John Budd, FCA, of Cumberland Asset Management in Toronto. John has always been a source of helpful advice, encouragement, enthusiasm, and a wealth of wisdom garnered from his many years as a highly respected professional advisor. He is also the co-author of a book we wrote called The Canadian Guide to Will and Estate Planning, and the author of the bestselling book Second-Property Strategies.

I would like to thank the staff of John Wiley & Sons for their ongoing support, professionalism, and insightful feedback.

Last but not least, I would like to express my appreciation to Don Loney, Executive Editor of John Wiley & Sons, for his patience and encouragement in the development of this book. I have had the pleasure of knowing Don for over 15 years. I have indeed been fortunate to work with such a consummate professional in the publishing business.

Introduction

If you are reading this book, you are one of the many Canadians who desire to own a recreational property, and want to learn how to make the right purchase through informed decision making and practical insights.

The term recreational property refers to a range of options, including an existing home (chalet, cabin, cottage, etc.), building lot, or hobby farm, with recreational features nearby. It could also consist of resort condominiums.

Recreational features consist of numerous types of outdoor choices for exercise, recreation, or enjoyment, including fields, mountains, rivers, lakes, oceans, ski hills, golf courses, campsites, and recreational vehicle parks. Activities could include snowmobiling, hunting, hiking, climbing, boating, canoeing, sailing, fishing, downhill or cross-country skiing, or other recreational pursuits. Your vacation home could be located in a rural or resort area.

Possibly you want a vacation property for personal use and lifestyle enjoyment, and plan to pass it to your children, and so on down through the generations. Maybe you want it for long-term investment, or for rental revenue purposes, or a combination of personal use and periodic or seasonal rentals. You might plan to have an all-season vacation home as your future retirement home. Alternatively, you might have considered buying a vacation home in the United States or abroad for investment, or to live there part-time during the winter months as a snowbird.

When you buy your vacation home, your preference could be to buy it on your own, with other family members or friends, or with an independent group of investors.

Possibly you already own a vacation home, or have inherited one, or know you will be doing so in the future. You could be concerned about the tax and estate planning implications of passing the property on to family members or selling it. At the time of your death, your vacation property could be subject to probate taxes as well as capital gains tax. There is a deemed disposition of your assets on death. This could result in a substantial and unexpected financial impact on your estate, necessitating the possible sale of the property to pay the taxes. However, with some highly skilled professional tax advice, you might be able to strategically structure your vacation property ownership to legitimately avoid, minimize, or defer the capital gains tax hit during your life, and on your death.

Why Recreational Properties Are in High Demand

Various trends and other motivating factors are causing a keen interest in buying rural, recreational, or resort property. Here are some of the key influencing factors:

√ Availability of more leisure time.

√ Preference for an enhanced quality of life, to provide balance from a hectic urban or metropolitan-based career, or from expense and time involved in commuting.

√ Combination of best aspects of country and city life.

√ Desire to have a simpler, less complex existence.

√ Desire to be close to recreational interests.

√ Desire to operate a business out of the second home, and only commute to the city as needs require.

√ Dream of having a family retreat for the immediate, extended, or blended family, which could possibly be passed on to succeeding family generations.

√ Desire to have a future retirement home.

√ Intention to buy a lot in the desired area, and build when sufficient funds have been saved; in the meantime, possibly use the land by purchasing a mobile home or recreational vehicle.

√ Attracted by the fact that recreational properties are less expensive to purchase, in general terms, than urban or metropolitan properties.

√ Increase in demand (and therefore value) for recreational or rural property that is proximate (within a four-hour driving distance) to a metropolitan or urban population growth area.

√ A growing number of people anticipate they will inherit funds that will allow them to buy a second home.

There are some potential downsides to purchasing recreational property. These are general comments, however, and there are many exceptions.

√ Lenders are sometimes reluctant to lend money or approve a mortgage for recreational property that is in a remote location, or is raw land.

√ There may be some restrictions on land use, especially if you plan to buy in an area of high agricultural use.

√ If you have a seasonal vacation property, and intend to rent it out, you could have a negative cash flow (shortage in revenue to offset expenses) that you would have to subsidize.

√ Maintenance of the property could be frustrating if you are far from home.

√ Vandalism is more likely if the property is in a remote location or only has seasonal usage.

√ If the economy is in a recession, the value of property can diminish considerably, as the demand for recreational property is generally considered a luxury and not a necessity. This can be problematic if you need to sell during this period.

Most of these issues can be addressed—and even avoided—with advance knowledge and good planning. This book will explain how you can do that.

Highlights of Chapter Contents

To have a contextual sense for the book contents, here is a brief overview. Each chapter is mutually exclusive, but inter-related. The book is divided into different parts with similar themes for the chapters within each part. They are:

Part I—The Realities of Realty

This section gives an overview of how the real estate market works in terms of cycles, and what cues tell you where in the cycle the market is for your geographic area of interest. The section also covers why real estate in general is historically a good investment, and why recreational property in particular has enjoyed attractive appreciation.

Part II—Finding the Right Fit

This section discusses the various types of recreational real estate that you may wish to consider, and how to locate and select the right vacation property fit for your needs and wants. How to establish recreational property investment strategies is also explained, along with the types of professional and other advisors you should use, and how to select your key advisors. This includes lawyers, accountants, realtors, building inspectors, mortgage brokers, and insurance brokers.

Part III—Show Me the Money

This section cover the steps you need to follow to make the purchase happen with the least amount of stress and risk, and the greatest amount of satisfaction with the outcome. Buying or renting a vacation home involves financial issues and options. The chapters in this section cover a range of choices available. One chapter will discuss the key tips you need to know when accessing financing and getting the best deal, as well as creative financing options using your RRSP. Another chapter covers negotiating strategies to get the best deal. There is a chapter on investing in recreational real estate on your own, or with others.

Part IV—Planning for Peace of Mind

This is a particularly important section, to provide you with awareness and knowledge on your decision-making strategic options. These options will save you a lot of money and grief, and provide you with the basis for discussion with your professional advisors. Chapter topics include the type of planning and strategies you need to consider in advance to protect your legal interests and your financial investment, save money on tax, and avoid family squabbles. You will also find advice on how to maximize your capital gain when you come to sell your vacation property, while minimizing the tax you pay for that gain.

Part V—Now That It’s Yours

If you are planning to own vacation property with others such as friends or family, or share your home with others, this section will provide some helpful insights and practical suggestions. The chapters cover the topics of buying and owning vacation property, as well as how to maintain harmony when sharing with others. This could include a family cottage that you and your siblings have inherited from your parents, or that you know you will inherit in the future.

Now that you own a vacation property, there are creative options available to expand your enjoyment and possible revenue. One chapter in this section will discuss the process of home exchanging with other property owners throughout the world, on a simultaneous or non-simultaneous basis, as well as the concept of trade or barter exchange. This simply means that you make your vacation home available at times you are not using it, or during a slow period for rentals, for an exchange purpose. The typical exchange format involves you putting a monetary value on the time being used, and getting credit towards other goods and services you may wish from a wide range of other exchange club business members.

There is also a chapter on generating revenue from your vacation home, whether you market and rent it out yourself, or use a professional rental management company.

Part VI—Outward Bound

Have you considered buying a vacation home in the United States, Mexico, or another country for personal use or rental income or a mixture of both? If so, you will find the chapter in this section will provide a reality check of the issues and cautions that you need to know.

At some point, you will need or want to sell your vacation home. When that time comes, you want to make sure that you get the best price for your second home or investment property. This chapter will cover the techniques for doing so.

Appendix

You will find a wealth of resources in the Appendix, including an extensive glossary, helpful websites, and informative checklists.

Seminar Education

This book is a helpful resource for a comprehensive overview of the key issues you need to know. However, to fully enhance your learning experience, you may wish to attend some of the seminars offered nationally by the National Real Estate Institute Inc. There are seminars on recreational real estate, as well as real estate investing, taught by professionals and other experts on the topic areas.

For more information about upcoming seminars in your area, and to be on a mailing list, refer to the website www.homebuyer.ca.

PART I

The Realities of Realty

CHAPTER 1

How the Real Estate Market Works

In order to have a better appreciation of buying your recreational property, you need to understand the basics of how the real estate market operates, the various cycles, and the factors that influence prices. The market is a fluid and dynamic process, and no buying or selling decisions should be made without an accurate and objective market assessment.

The Real Estate Cycle

Real estate is a cyclical industry. As in any such industry, the cycle historically creates shortage and excess, which is related to supply and demand in the marketplace. Too much supply creates a reduction in value. Too little supply creates an increase in value. It is essential to know where you are in the cycle relative to the property you are considering to purchase. Different provinces, regions, and communities are at different points of the economic cycle at any given time. Also, there can be micro economic and real estate cycles within the same community. Timing in the cycle is important when making buying and selling decisions.

One of the reasons for the cycle is that many developers are entrepreneurial by nature and operate primarily by short-term planning. If financing and credit are available, developers tend to build without regard for the overall supply and demand. If a consequent glut occurs and the demand is not there, prices come down as houses and condominiums go unsold. The phases of the real estate cycle will be discussed later in this chapter.

External Factors that Can Affect the Real Estate Market

General Business Economic Cycles

The economy historically goes through periods of increased economic growth followed by periods of recession. In any given cycle, the economic impact is greater, of course, in certain parts of the country than in others. In a recession, people lose their jobs, can’t afford their mortgage payments, and have to put their houses on the market. Real estate prices become depressed as potential purchasers decide to wait until the economy is more secure. It is difficult to know for certain when the economy will turn around, but various indicators (which will be discussed later in this chapter) should give you some insight.

If the economy has been in a recession for a sustained period, there could be opportunities to buy property. Once the economy comes out of a recession, prices tend to climb. Conversely, if the economy has been on a buoyant growth trend for an extended period, be very cautious in purchasing because a change in the cycle, and therefore a drop in real estate prices, could be imminent.

Local Business Cycle

Each local economy has its own cycles and factors that affect real estate prices. These factors may not be greatly influenced by the general (provincial or national) business cycles just discussed.

Community Cycle

Certain geographic locations within a community can have their own economic cycles as well as supply and demand, all of which affect real estate prices. A new factory or other industry can inject new life into a local economy, strengthening the housing market in the process. And those properties with very good geographic locations, such as waterfront, may retain their value better, even during recession, than other properties might. In addition, a community has its own life cycle, from growth to decline to stagnation to rehabilitation. Look for areas of future growth.

As you can see, being aware of economic, business, and community cycles is critical to prudent decision making. Before buying or selling real estate in a certain area, determine what external factors are prevalent and how they affect the cycle of the real estate market. Different types of real estate—for example, vacation cottages, winter chalets, resort condominiums—can be at different points within the real estate cycle.

There are four distinct segments to a real estate cycle. Each of these segments has identifiable characteristics and therefore helpful clues for assessing the state of the real estate cycle. Refer, too, to Chart 1 in the Appendix.

Three Types of Real Estate Markets

You undoubtedly are familiar with the common terms used to describe the three types of real estate markets. Using the residential housing market as an example, here is a brief review of the different types:

Seller’s Market

In a seller’s market the number of buyers wanting to buy a home exceeds the supply or number of homes on the market. In this type of market homes sell quickly, prices increase, and there are lots of buyers for the minimal number of available homes. These characteristics have implications for the buyer, who has to make decisions quickly, must pay more, and frequently has his or her conditional offers rejected.

Buyer’s Market

In a buyer’s market the supply of homes on the market exceeds the demand or number of buyers. In this type of market, homes need longer selling periods, there are more homes for sale than buyers, and prices decline. Buyers in this type of market have favourable negotiating leverage, more time to search for a home, and better prices.

Balanced Market

In a balanced market, the number of homes on the market is equal to the demand or the number